Blog #95: How Much Do I Really Need?

Getting Started with InsMark Training Video

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Bob Ritter Blog How Much Life Insurance Do I Really Need? image

How much life insurance do I really need?” is not a difficult question to answer.  A well-designed needs analysis program can usually provide the solution.  InsMark has a good one -- Survivor Needs Analysis -- in the InsMark Illustration System (located on the Personal Needs Analysis tab).

But first I’ll use our Cash Flow Analysis module from that same location to determine four different evaluations, and then introduce Survivor Needs Analysis.

Be patient!  The end result will include a very nice sale of cash value life insurance.

Case Study

(Using Basic Planning as a

Pathfinder to Advanced Planning)

John and Mary Mason have recently purchased a $1,000,000 term policy on John.  Their reasoning is: If something happens to John and that $1,000,000 can earn 5.00% (pre-tax), it can provide $50,000 of family income over 20 years while conserving principle.

What about income tax and inflation?  Let’s see what they have to do to meet this goal.

Note:  Due to rounding over a twenty-year analysis, some of the numbers end up higher or lower than expected by a dollar or two.

1.

Conserve Principal

(Cash Flow Analysis module)

Assuming no principal is spent, $1,000,000 could produce annual after tax cash flow of $36,145 for 20 years while conserving the principal amount of $1,000,000.  Total after tax cash flow is $722,900.

Click here to review this report.

Note:  If the U.S. experiences just 3.00% inflation, by the 20th year that $36,145 will have buying power of just $20,613.

2.

Conserve Principal - Adjustment for Inflation

(Cash Flow Analysis module)

Assuming no principal is spent and a 3.00% factor for inflation is included, the annual after tax cash flow drops to a starting point of $27,890 increasing gradually to $48,906 in year 20 -- still conserving the $1,000,000 of principal.  This approach protects the purchasing power of the $27,890.  Total after tax cash flow is $749,426.

Click here to review this report.

3.

Spend Principal

(Cash Flow Analysis module)

Spend principal to increase the cash flow -- this could produce annual after tax cash flow of $69,361 with no inflation offset.  Total after tax cash flow is $1,387,220.  There is no principle remaining.

Click here to review this report.

Note:  If the U.S. experiences just 3.00% inflation, by the 20th year that $69,361 will have buying power of just $39,566.

4.

Spend Principal - Adjustment for Inflation

(Cash Flow Analysis module)

Spend principal with a 3.00% inflation offset to the cash flow -- the annual after tax cash flow drops to a starting point of $53,521 increasing gradually to $93,849 in year 20.  This approach protects the purchasing power of the $53,521.  Total after tax cash flow is $1,438,126.  There is no principle remaining.

Click here to review this report.

5.

Conserve Principal - Adjust for Increased Cash Flow and Inflation

(Survivor Needs Analysis module)

Conserve $1,000,000 of principal and maintain $53,521 of cash flow (same as #4) plus the 3.00% inflation adjustment.  Total after tax cash flow is $1,438,129; however, this requires additional life insurance of $478,894 as reflected in the Bar Graph below from our Survivor Needs Analysis module.

additional life insurance is required graph from InsMark's Survivor Needs Analysis module image

Click here to review this report.

Purpose of the Analysis

What has been the purpose of this analysis -- to make a term insurance sale of an additional $478,894?  No, it is designed to induce John and Mary to use Survivor Needs Analysis for a more comprehensive look at their overall survivor needs coupled with the assets they have to apply on those needs -- not just the life insurance policy.  If the most effective use of their current life insurance means they need almost 48% more coverage, maybe they should be more precise in their overall evaluation.

Determining the financial needs of survivors is a dying art in the life insurance business, and I am very proud we are keeping it front and center in our software.  Speaking of “proud”, MONEY magazine ran a contest a few years back entitled “The MONEY Life Insurance Test”.  Producers from MassMutual, Northwestern Mutual, and several other top companies participated.  Our Survivor Needs Analysis provided the analytical tools used by State Farm Agent, Thomas Davis, for his first place finish in the contest.

Click here to read that report from MONEY magazine.

We also used our Survivor Needs Analysis module effectively in four recent Blogs (using different case data).  The ultimate goal of those Blogs is to persuade the clients that they need to add retirement planning to their survivor planning.

I think you will be very interested in how we convinced them to acquire substantial cash value life insurance policies on both husband and wife with combined annual premiums in excess of $12,000 (up from the few hundred dollars that term insurance costs them) yet require no out-of-pocket cash flow from them.  Blogs #77 and #47 below involve cash flow neutral analyses which means that the premiums for the cash value policies are paid from assets which are replaced (and then some) by way of the policies’ values.

I recommend you first view the short videos in Blogs #76 and #77; then, if you are interested in more details, review Blogs #46 and #47.

A Quick Video Review
Blog #76: Smart Use of Term Coverage for Funding College Costs
(6 ½ minutes)
Blog #77: Integrated Planning for College and Retirement
(8 ½ minutes)
A Detailed Analysis of the Same Data
Blog #46: Let’s Make Sure the Girls Go to College
Blog #47: Tom and Kristin’s Retirement Planning

Note:  Business owners also need to know “how much” life insurance to carry on key executives.  That’s why we also have the Key Executive Life Insurance Calculator located in the InsMark Illustration System.  If this interests you, check out Blog #44.

 

InsMark’s Digital Workbook Files

If you would like some help creating customized versions of the presentations in this Blog for your clients, watch the video below on how to download and use InsMark’s Digital Workbook Files.

New Zip File Downloaders
Watch the video.

Digital Workbook Files For This Blog

Blog95.zip

Download all workbook files for all blogs

Experienced Zip File Downloaders Download the zip file, open it, and double click the Workbook file name to open it in your InsMark System.

Note:  If you are viewing this on a cell phone or tablet, the downloaded Workbook file won’t launch in your InsMark System.  Please forward the Workbook where you can launch it on your PC where your InsMark System(s) are installed.

 

Licensing

To license the InsMark Illustration System, visit us online or contact Julie Nayeri at julien@insmark.com or 888-InsMark (467-6275).  Institutional inquiries should be directed to David Grant, Senior Vice President - Sales, at dag@insmark.com or (925) 543-0513.

InsMark’s Referral Resources
(Put our Illustration Experts to Work for Your Practice)

We created the Referral Resources listed below to deliver a “do-it-for-me” illustration service in a way that makes sense for your practice.  All are IMOs and InsMark Agency Platinum Power Producers®, and they are highly skilled at running InsMark software.  They will utilize your choice of insurance company, and they do not require a commission split.

Mention my name when you talk to our Referral Resources as they have promised to take special care of my readers.  My only request is this: if a Referral Resource helps you get the sale, place at least that case through them; otherwise, you will be taking unfair advantage of their generous offer to InsMark licensees.

Save time and get results with any InsMark illustration!

Joint Interviews

If you want or need help from a qualified producer for joint interviews with any InsMark illustration and are willing to share the case, email us at bob@robert-b-ritter-jr.com with details of the case, and we will provide you with recommendations.

Testimonials:

“InsMark is the Picasso of the financial services world — their marketing savvy never fails to amaze me.”

Doug Peete, Past President, Top of the Table, InsMark Silver Power Producer®, Overland Park, KS

“InsMark is an absolutely mind blowing experience.”

Larry Gustafson, InsMark Platinum Power Producer®, Denver, CO

“InsMark is an integral part of my business and has been for many years.  A great partner!”

Jeffrey Berg, InsMark Platinum Power Producer®, Edina, MN

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More Recent Blogs:

Blog #94: How to Double Your Affluent Clients

Blog #93: Maybe the Best Executive Benefit Plan Ever

Blog #92: The Prospecting Magic of Endorsed Referrals from CPAs

Blog #91: The Best of InsMark at the Symposium

Blog #90: Video on Avoiding a $20 Million Mistake

 

3 Reasons Why It’s Profitable For You To Share These
Blog Posts With Your Business Associates and
Professional Study Groups (i.e. “LinkedIn”)

 

Robert B. Ritter, Jr. Blog Archive

 

Blog #94: How to Double Your Affluent Clients

Getting Started with InsMark Training Video

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This is 2015 InsMark Symposium week, and I am really jammed up with preparations for my part of the Main Platform presentations.

Scott Keffer imageSo as a favor, I asked my good friend, Scott Keffer (whom you’ll meet at the Symposium), if he would mind if I featured one of his key seminars in this week’s Blog.

My reason for this is because while we strive to provide the very best tools and information to help you provide extraordinary service to your clients, I think with Scott’s help you could reach many more of them.  In fact, his forthcoming seminar is titled, the Double Your Affluent Clients® Boot Camp, which is scheduled for May 6-8, 2015, at the Airport Hyatt in Pittsburgh, PA. (See below to sign up.)

Below are just a few of the highlights you don’t want to miss:

  • Scott’s very simple formula for doubling your annual revenue, while maintaining your sanity.
  • How to Position Yourself as a “Leading Authority!” rather than just an advisor…and lock out your competition.
  • What the affluent really want from their advisors in this economy so you can speak their language and close more clients.
  • How to fine-tune your brand, your positioning and your perception of yourself to create success more systematically than any marketing trick could.
  • The #1 thing the affluent want you to provide…give it to them and they’ll never think of leaving you.
  • How To Quickly Transform Your Staff into a “Servant Team” that will methodically attract and care for clients so well they’ll never leave.
  • The 5 Keys To Upgrade Every Client…how to implement escalation structures to make and KEEP more money from every single client.
  • How To Turn Your Clients into Raving Fans and Referral Machines.

Scott’s warning: “Don’t Waste Another Dollar On Traditional Advisor Marketing Gimmicks Until You Discover Why It’s Not Working And What Your B/D, FMO And Insurance Company Don’t Want You To Know!”

people at conferenceI strongly recommend that you attend Scott’s Double Your Affluent Clients® Boot Camp (sign up at the bottom of the Boot Camp webpage).  As an additional incentive, Scott has graciously offered our advisors a generous $1500.00 discount at www.RitterRewards.com (use code: Insmark).

Click here to sign up and remember to use the code “Insmark”.

I’ll see you back here next week. . .

 

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More Recent Blogs:

Blog #93: Maybe the Best Executive Benefit Plan Ever

Blog #92: The Prospecting Magic of Endorsed Referrals from CPAs

Blog #91: The Best of InsMark at the Symposium

Blog #90: Video on Avoiding a $20 Million Mistake

Blog #89: Another Great Video -- IRA Rescue Made Easy

 

3 Reasons Why It’s Profitable For You To Share These
Blog Posts With Your Business Associates and
Professional Study Groups (i.e. “LinkedIn”)

 

Robert B. Ritter, Jr. Blog Archive

 

Blog #93: Maybe the Best Executive Benefit Plan Ever

Getting Started with InsMark Training Video

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Bob Ritter's Blog 93 Maybe the Best Executive Benefit Plan Ever image

Executive bonus plans using cash rich life insurance policies are among the best of the executive-owned benefit plans that are used to provide significant pre-retirement death benefits to the executive’s family plus substantial tax free retirement cash flow.  When these arrangements are provided to key non-owner executives, there is a technique called the Controlled Executive Bonus that aids considerably in their retention.  It can be used for executives employed by C Corporations, S Corporations, LLCs, Partnerships, and Tax Exempt Organizations.

Note:  A Controlled Executive Bonus is typically not used to provide a benefit for an owner.  Its use is primarily for non-owner executives.

Important non-owner executives are simple to identify if you pose the following question to the owner:

“Do you have any non-owner executives who are so valuable to your business that you will do whatever is economically reasonable to induce them to stay with you?”

Assuming an interested owner surfaces, consider introducing the Controlled Executive Bonus.  This variation typically uses a single, gross-up, or graded bonus with provisions in the plan agreement that the bonus must be repaid to the employer if the executive terminates employment by a certain date (for example, within 5, 10, or 15 years or, perhaps, at retirement) for reasons other than death or disability.  It outperforms loan regime split dollar and is reminiscent of classic equity split dollar, but with none of the disadvantages.  (More on this below.)

Case Study

Billy Mayfield, age 45, is the General Manager of Eagle Lake Ford, LLC.  Billy has been provided with a $1,200,000 life insurance policy with five scheduled premiums of $50,000 funded with a bonus equal to each policy premium.  In Billy’s personal, marginal tax bracket of 40%, it will cost him $20,000 a year in taxes for five years, and all policy values are his property -- subject, of course, to the bonus repayment obligations.

The goal of the plan is to induce Billy to remain with Eagle Lake Ford for at least five years, and the firm will likely repeat the benefit at the end of five years as further inducement to Billy.

Below are Billy’s costs and benefits over the first five years of the plan. The rate of five-year return is extraordinary (pre-tax equivalent rate of return of 52.41% on cash value) largely because Billy has acquired the policy at a 60% discount from its annual premium cost of $50,000 paid by the employer by way of a bonus.

executives costs executives values image

gross interest taxable investment rate cash value death benefit image

Below is an example are Billy’s repayment obligations using data from the Executive Security Plan module in the InsMark Illustration System.  I added year 6 to illustrate when, in this case, repayment is no longer required.

executives repayment obligations image

Assuming the plan is constructed properly to provide a meaningful reason for Billy to remain employed, full vesting at the end of year 5 when the repayment obligation ends should seriously help accomplish this.

Below is a review of the overall costs and benefits of the plan using a single bonus with a repayment obligation of 100% of the bonus over five years.

executives employers cumulative net payments loan proceeds cash value death benefit image

Click here to review the full illustration.
(Page 7 shows the bonus repayment obligations.)

An alternative option for the employer might be to establish a sliding scale of repayment as shown in the example below.

executives repayment obligations sliding scale image

Another alternative would be to use a gross-up bonus which, while increasing the employer’s costs, includes the income tax on the bonus resulting in $0 out-of-pocket cost to the executive -- provided employment is not terminated earlier.

executives repayment obligations gross up bonus image

Below is a review of the overall costs and benefits of the plan using a gross-up bonus with a repayment obligation of 100% of the bonus over five years.

executives employers cumulative net payments loan proceeds cash value death benefit gross up bonus image

Click here to review the full illustration.
(Page 7 shows the bonus repayment obligations.)

Conclusion

The Controlled Bonus Plan is easy to understand, has minimal plan administration, and is highly valued by sponsors and participants.

It is maybe the best executive benefit plan ever.

Documentation

Special documents are needed to support a Controlled Executive Bonus.  It requires a special Resolution and Employment Agreement (or, perhaps, an amendment to a current employment agreement) outlining the employer’s bonus commitment and the executive’s repayment requirements.

Also needed is an Endorsement of Policy Ownership Rights Agreement. Its purpose is to restrict access to policy values prior to retirement without the express written permission of the employer.  The Endorsement takes the form of an agreement between the business and the executive in which the executive agrees to this restriction.

The Endorsement is registered with the issuing insurance company and, as a result, the executive is unable to take any action on the policy other than that allowed by the Endorsement.  One of life’s frustrating experiences involves an executive who starts a competing business using funds from an employer’s benefit plan that were designed to provide retirement benefits.  The Endorsement eliminates this occurrence.

In the event of an executive’s death prior to retirement, the Endorsement allows the immediate payment of the death proceeds to the executive’s family.

Documents On A Disk imageComprehensive specimen documents for all aspects of the Controlled Executive Bonus are available in Version 21.0 (and higher) of InsMark’s Documents On A Disk™ in the Key Employee Benefit Plans section.

Controlled Executive Bonus vs. Loan Regime Split Dollar

The Controlled Executive Bonus variation is superior to Loan Regime Split Dollar in almost all respects.

  • Unlike loan-regime split dollar, the employer’s funding costs are deductible.
  • Unlike loan-regime split dollar, there is no applicable federal rate (AFR), nor offset issues, nor original issue discounts involved.  This is of immense value in what is expected to be an increasing interest rate environment.
  • Unlike loan-regime split dollar, once the repayment period expires in the bonus plan, there is no requirement for the executive to repay the employer or, alternatively, have substantial taxable income when split dollar values are traditionally rolled out.
  • Unlike loan-regime split dollar, the bonus plan is more easily and efficiently portable.
  • Unlike loan-regime split dollar, senior officers of publicly-owned corporations can use the bonus plan (with or without the controlled bonus feature) whereas they are unable to use loan-regime split dollar due to the prohibition against loans to senior executives contained in Sarbanes-Oxley legislation.
  • Unlike loan-regime split dollar, executive-owned bonus plans should not require ERISA compliance.
  • Note:  In all cases, a client’s tax advisers should carefully review the circumstances to determine if ERISA is applicable.

Click here for a further discussion of the Controlled Executive Bonus vs. Loan Regime Split Dollar.

Management Tool

The Controlled Executive Bonus with a gross-up bonus provides additional management information when offered to an important, non-owner executive like Billy Mayfield.  Assume the plan has very significant mid- to long-range benefits but contains a 100% liability for bonus repayment if employment terminates within five years.  If the executive accepts the plan with its five-year contingent liability, the owner may be fairly certain that this executive intends to remain with the company for at least the next five years.

Alternatively, suppose this executive elects not to participate in the plan.  The employer has just discovered that this executive may be ready to consider alternative employment and is not interested in a benefit plan with a short-term contingent liability.  Clearly, a decision not to participate has turned up valuable information that would otherwise be difficult to determine.

 

InsMark’s Digital Workbook Files

If you would like some help creating customized versions of the presentations in this Blog for your clients, watch the video below on how to download and use InsMark’s Digital Workbook Files.

New Zip File Downloaders
Watch the video.

Digital Workbook Files For This Blog

Blog93.zip

Download all workbook files for all blogs

Experienced Zip File Downloaders Download the zip file, open it, and double click the Workbook file name to open it in your InsMark System.

Note:  If you are viewing this on a cell phone or tablet, the downloaded Workbook file won’t launch in your InsMark System.  Please forward the Workbook where you can launch it on your PC where your InsMark System(s) are installed.

 

Licensing

To license the InsMark Illustration System or cloud-based Documents on a Disk, contact Julie Nayeri at julien@insmark.com or 888-InsMark (467-6275).  Institutional inquiries should be directed to David Grant, Senior Vice President - Sales, at dag@insmark.com or (925) 543-0513.

InsMark’s Referral Resources
(Put our Illustration Experts to Work for Your Practice)

We created the Referral Resources listed below to deliver a “do-it-for-me” illustration service in a way that makes sense for your practice.  All are IMOs and InsMark Agency Platinum Power Producers®, and they are highly skilled at running InsMark software.  They will utilize your choice of insurance company, and they do not require a commission split.

Mention my name when you talk to our Referral Resources as they have promised to take special care of my readers.  My only request is this: if a Referral Resource helps you get the sale, place at least that case through them; otherwise, you will be taking unfair advantage of their generous offer to InsMark licensees.

Save time and get results with any InsMark illustration!

Joint Interviews

If you want or need help from a qualified producer for joint interviews with any InsMark illustration and are willing to share the case, email us at bob@robert-b-ritter-jr.com with details of the case, and we will provide you with recommendations.

Testimonials:

“Thanks to InsMark, we recently set business goals in our firm that I basically thought were ridiculously unachievable - until now.”
Brian Langford, InsMark Platinum Power Producer®, Plano, TX
“InsMark is the best value for me in the industry.”
Mike Breedlove, InsMark Platinum Power Producer®, Tyler, TX
“InsMark is an absolutely mind blowing experience.”
Larry Gustafson, InsMark Platinum Power Producer®, Denver, CO

 

Important Note

The information in this Blog is for educational purposes only.  In all cases, the approval of a client’s legal and tax advisers must be secured regarding the implementation or modification of any planning technique as well as the applicability and consequences of new cases, rulings, or legislation upon existing or impending plans.

 

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More Recent Blogs:

Blog #92: The Prospecting Magic of Endorsed Referrals from CPAs

Blog #91: The Best of InsMark at the Symposium

Blog #90: Video on Avoiding a $20 Million Mistake

Blog #89: Another Great Video -- IRA Rescue Made Easy

Blog #88: An Exceptional Video -- Equity Rescue Made Easy

 

3 Reasons Why It’s Profitable For You To Share These
Blog Posts With Your Business Associates and
Professional Study Groups (i.e. “LinkedIn”)

 

Robert B. Ritter, Jr. Blog Archive